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Investors are always looking for growth in small-cap stocks like Beijer Ref AB (publ) (STO:BEIJ B), with a market cap of kr29b. However, an important fact which most ignore is: how financially healthy is the business? Assessing first and foremost the financial health is essential, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. Let's work through some financial health checks you may wish to consider if you're interested in this stock. Nevertheless, this is just a partial view of the stock, and I recommend you dig deeper yourself into BEIJ B here.
Does BEIJ B Produce Much Cash Relative To Its Debt?
Over the past year, BEIJ B has ramped up its debt from kr2.1b to kr3.7b – this includes long-term debt. With this rise in debt, BEIJ B currently has kr774m remaining in cash and short-term investments to keep the business going. Additionally, BEIJ B has produced cash from operations of kr885m in the last twelve months, leading to an operating cash to total debt ratio of 24%, indicating that BEIJ B’s operating cash is sufficient to cover its debt.
Can BEIJ B meet its short-term obligations with the cash in hand?
With current liabilities at kr3.7b, it appears that the company has been able to meet these commitments with a current assets level of kr7.4b, leading to a 2.04x current account ratio. The current ratio is the number you get when you divide current assets by current liabilities. Usually, for Trade Distributors companies, this is a suitable ratio since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Can BEIJ B service its debt comfortably?
BEIJ B is a relatively highly levered company with a debt-to-equity of 91%. This is a bit unusual for a small-cap stock, since they generally have a harder time borrowing than large more established companies. We can check to see whether BEIJ B is able to meet its debt obligations by looking at the net interest coverage ratio. A company generating earnings before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. In BEIJ B's, case, the ratio of 23.7x suggests that interest is comfortably covered, which means that lenders may be inclined to lend more money to the company, as it is seen as safe in terms of payback.
Although BEIJ B’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet obligations which means its debt is being efficiently utilised. Since there is also no concerns around BEIJ B's liquidity needs, this may be its optimal capital structure for the time being. I admit this is a fairly basic analysis for BEIJ B's financial health. Other important fundamentals need to be considered alongside. You should continue to research Beijer Ref to get a better picture of the small-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for BEIJ B’s future growth? Take a look at our free research report of analyst consensus for BEIJ B’s outlook.
- Valuation: What is BEIJ B worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether BEIJ B is currently mispriced by the market.
- Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
If you spot an error that warrants correction, please contact the editor at email@example.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.